American River Bankshares' (AMRB) CEO David Ritchie on Q1 2018 Results - Earnings Call Transcript

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About: American River Bankshares (AMRB)
by: SA Transcripts

American River Bankshares (NASDAQ:AMRB) Q1 2018 Results Earnings Conference Call April 19, 2018 4:30 PM ET

Executives

David Ritchie - CEO

Mitch Derenzo - EVP and CFO

Analysts

Tim Coffey - FIG Partners

Tim O’Brien - Sandler O’Neill

Don Worthington - Raymond James

Operator

Welcome to the First Quarter 2018 Earnings Conference Call. My name is Adrian and I will your operator for today’s call. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note this conference is been recorded.

I will now turn the call to David Ritchie. David Ritchie, you may begin.

David Ritchie

Thank you, Adrian. And thank you all and good afternoon, everyone. This is Dave Ritchie’s, CEO of American River Bankshares, parent company to American River Bank, headquartered in Rancho Cordova, California. I’m pleased to be here with you today with an update on our first quarter activities.

As I shared with you on our fourth quarter investor call, my plan is for the Bank to grow profitable relationships. Very simply, I advise you we are well-positioned with our capital and liquidity and we need to start the deployment of capital. At the same time, we need to continue to keep our high client satisfaction ratings.

In the first quarter, we did execute on many of our initiatives that are instrumental in delivering on what we have set out to do. I will provide you all with an update after the financial report. Please be advised of two press releases that went out in the market today. First, our earnings release with detailed quarterly results; the second was cash dividend that will be paid next month.

Now, I’m going to turn it over to Mitch Derenzo, Executive Vice President and Chief Financial Officer. And he will provide you with an in-depth discussion of our first quarter results.

Mitch Derenzo

Thank you, Dave. First, thank you all for listening in our call today. Before we get started, I need to remind everyone of our safe disclosures.

Certain matters discussed in this presentation may constitute forward-looking statements for the purposes of federal securities laws and may involve risks and uncertainties. Actual results may differ materially from the results in these forward-looking statements. Factors that might cause such a difference are discussed in our annual report on our Form 10-K for the year ending December 31, 2017 and in subsequent reports filed on forms 10-Q and 8-K. We do not undertake any obligation to publicly update or revise any of these forward looking statements, which would include information or future events, except as required by law. Links to this annual report and 10-K can be found on our website, americanriverbank.com.

As within past conference calls, I’m going to try to highlight some of the key areas from the press release that Dave mentioned went out this morning. I’m going to try to provide some additional details and analysis and will turn it back over to Dave for some additional comments, and then open the lines for questions.

This morning, American River Bankshares reported net income for the first quarter of 2018 of $1.4 million compared to $1.2 million during the first quarter 2017. Earnings per share were $0.22 a share, compared to $0.18 a share in the first quarter of 2017. The ROA and ROE for the quarter were 0.8 and 7.39%, respectively that compares to 0.74% and 5.74% respectively one year-ago.

Our balance sheet…[Technical Difficulty] should turn us around the future, once we get the new lenders up and running. New loans added during the first quarter were just $1.7 million. We know that’s not going to be enough to grow loans.

I am going to jump to got little bit here on Dave’s comments later in the call but he is going to talk about some of the new lenders. I’m just going fill in here that I am seeing quite a bit of positive loan discussion here the last few weeks since this lender started in early April. Of course, no guarantees, these discussions will lead to loan growth, but I’m liking what I’m hearing so far.

I guess the only positive thing about loan payoffs is we are collecting the prepayment penalties. Loan paydowns during the first quarter of 2018 did produce $124,000 in prepayment penalties that compares to $83,000 for the first quarter of last year.

On the credit quality, really not much changed during the quarter. We did have about $10,000 in recoveries and zero in charge-offs. And there really isn’t a whole lot to report on our shared national credits loan that we’ve been talking about past two quarters. We continue to monitor very closely. We’re gathering all the information we can as it becomes available. And I’m just going to let you know that if we find any additional information that requires a write-down, we are going to do so in the future.

Our adjusted balance is down to $1,560,000. We do have a $200,000 specific reserve on the loan. So, our net exposure is down to $1,362,000. That one loan represents 84% of our non-accrual loans. Rest of those non-accrual loans made up of the $289,000 commercial real estate property and then small $4,000 consumer loan.

I mentioned in the last quarter that commercial loan property was in escrow. It’s still in escrow; there have been some delays. We are trying to work with the buyer and seller to get that one closed. We believe that if it does get closed, we should expect a full recovery, assuming the sales price closes at the current sales price.

The allowance to loans, 1.48% at March 31, 2018 that compares to 1.52% a year-ago. On the past due, we had one loan that was over 30 days, excluding non-accrual loans of course. That one loan was $70,000 and the borrower is in the process of refinancing that to a third-party.

No activity on the OREO side. We still have the one with the net book balance of $961,000. Classified equity at the end of the quarter was just 4.5%. Of course with the classified assets being the $1.9 million in non-accrual and $961,000 OREO.

On the investment portfolio, really no changes there as well. As far as the quality goes, it’s still well structured cash flowing mortgages, mixed in with the little bit of municipal bonds. At the end of the quarter, the balance was $288.8 million that compares to $262.7 million at the end of 2017. In addition, we did end the quarter with $38,000 in fed funds. These increased balances from the fed funds and the securities obviously results from a nice increase in deposits, and I’ll talk about those in a minute but some of those deposits that we have in the bank may be for a short period of time. So, the fed funds is the best place to park those.

About 89% of the portfolio is still in U.S. government’s guaranteed or sponsored agencies, again primarily mortgage-backed securities. And the portfolio does -- it still remains short. Average lives of the mortgage products are 3.9 years. Average lives of the municipal bond portfolio is five years. And the effective duration of the entire portfolio is still quite low at around 3.1 years. And the price change and rates up 300 basis points is just a tad above 10%.

As you know, we’ve been experiencing an increase in market rates to be on the shorter end but those tend to cause a decrease in the unrealized gains on our bonds. And March 31st unrealized loss now because we did roll over to a loss side; it’s $2.2 million. A year ago, we had a unrealized gain of $800,000. This unrealized loss now is impacting our tangible book value. At March 31, 2017, we had an unrealized gain and that added $0.12 to the tangible book value per share. Whereas at March 31, 2018, unrealized loss created a reduction in our tangible book value of $0.38 per share, so a net difference of $0.50 per share.

On the liability side, deposits increased. We had $556.1 million at the end of the year and we’re up to just a tad over $600 million at the end of the quarter; that’s $44 million increase or nearly 8%. Much of that increase occurred in the money market, which increased from $130 million at the end of the year to a $165 million at the end of March. About half of deposit increase came from one relationship. This relationship sold their business which also added to the decrease in loan as they did pay off their loan balances as well when they sold the company. Those loan balances were about $3 million at the end of 2017, and those did pay off in the first quarter. Working with clients to determine how long these funds will stay with Bank, hence the March fed fund balance that I mentioned earlier.

The non-interest- balances -- actually, they decreased by about $2.8 million, but they’re still over 35% of our total deposits. Average cost of funds did increase a little bit about 8 basis points from 27 basis points to 35 basis points; 27 basis points in the first quarter last year versus the 35 basis points in the first quarter of 2018. Obviously, the higher market rate environments caused that increase primarily on the FHLB borrowing on the CDs, these roll over, we’re paying a little bit more. The overall cost of deposits still is just at 19 basis points, that’s up about 5 basis points from the first quarter of last year. Again that increase is due to the increased costs on our CD balances.

Capital levels remained strong. leverage ratio was 8.7% at the end of the quarter; total risk-based was 18.3 compares to 9.5% leverage and 19.3 total risk-based one year ago. As you know, we do have the stock repurchase program. We repurchased 268,178 shares of our common stock. Our average price paid was $15.47. Also Dave mentioned that we did release the cash dividend announcement this morning. We believe those to be good capital management strategies. [Technical Difficulty] Gains last year were $56,000; 2018, they were just a $1,000.

On the expense side, noninterest expense decreased $80,000 year-over-year, a lot of fluctuations that made up $80,000, some lines went up, some went down. Really nothing to point out to say this is the absolute reason other than I would to point out, we do have a onetime $25,000 rebate from our debit card processor that reduced the expense. So, that’s probably the biggest chunk of that $80,000.

Just kind of a [Technical Difficulty] on the federal side, down to 21. Pretax income was a $1,759,000 this year versus a 1,008,000 last year but the lower taxes help us out. Taxes last year were $616,000, down to $406,000 in 2018. Our effective tax rate last year was 34.2% that decreased to 23.1% in 2018. Of course that lower tax rate does impact the ratios as the ones we quote as fully taxable effective, reduced our margin by a couple basis points and our efficiency ratio by about 50 basis points.

Thank you. And I’m going to turn it back over to Dave now for some additional comments.

David Ritchie

Thank you, Mitch.

Yes, as I mentioned, we have had some early good progress in the first quarter, which includes we completed a focused and integrated strategic plan that aligns the company-wide efforts toward a single goal, which is return to top performance growth. I mean, that’s really what we’re all about. American River Bank [Technical Difficult] comment I made last quarter and I think, I told you all that I would update you on things we’re doing and help -- which will help you track our progress, which I think is very important.

One of the main items or one of the first things that I think [Technical Difficult]many people is we lack some branding. I think, we are not as visible in the communities we serve. So, part of our strategy was let’s take marketing dollars, foundation dollars and just pure sweat equity and kind of put all those things together and get back out in the community. And I am really excited to tell you that I think the count was nearly 80 different events in the first -- the first quarter. And our presence is definitely being felt through media and other avenues. And the other thing it’s really helped us do honestly is building the reputation helps us recruit. And telling our story, a consistent story, I think has really helped for that. It’s had people kind of wondering what’s going on in American River Bank. And hence, we’ve gotten some great opportunities and have hired some great new relationship managers because of it. That’s the first thing.

The second thing is just the whole hiring piece. My desire was to build up and staff a commercial banking team here. We started with five relationship managers since that time. One is retired, a couple have transitioned out of the bank. So, technically we were back to two. I’m really happy to tell you that we are officially at eight. We hired and we’ve hired some really skilled folks. The average number of years of experience is like 20 years. And so, we still have one more opening, we wanted to get to nine. The majority I think we’ve had -- well four of them have started this month alone. And I’m really excited about it. These are quality people with a lot of experience.

The other piece of it was we wanted to make sure we hired quality people from separate banks because that gives us a little diversity on the kind of relationships they have and the potential for bringing relationships over. We weren’t focused on any single bank. So, that -- I think there’s five or six banks, people from different walks of life. And so, it’s been kind of an nice first four months. So, now we have three teams, three RMs. We’re putting them in teams. One team in Santa Rosa and two teams in Sacramento, really excited about that the Santa Rosa team. I feel, we were pretty much -- we were underserved there for a long time and now we have three relationship managers there. So, I feel really good about that.

The other thing is it’s of interest, I believe. And I’m glad we have been able to do this. Three of the RMs have a lot of C&I experience, which is very difficult to find, and so that’s exciting. We have -- we brought these people on board. I can tell you in the last two or three weeks, there’s a lot of energy in the bank right now. I think, it should be noted as well as our senior leader in Santa Rosa has ag experience and wine business experience. And from my standpoint, I think we are ahead of the curve, ahead of the schedule hiring that we thought we would do. I think, we are a couple months ahead of where I thought we would be. So, I’m really excited about that, going in the right direction, and people are all engaged, and definitely want to be successful.

The third thing was with all that was just a buildup of pipeline. I think Mitch addressed this a bit. In the past couple weeks, we’ve had a lot of conversations around new relationship opportunities and how do we grow the loan pipeline. And it’s been terrific, it’s a new buzz here, and I think it’s definitely going in the right direction.

And the last update was the Chief Credit Officer. We’ve been -- we went through a process in mid February. We had some excellent candidates. I think we would all agree that we didn’t really find exactly what we were looking for. And so, we decided to be a little more patient over the last couple of months. I will tell you, we just completed a number of interviews with really qualified individuals and we are very fortunate to have such great candidates. It’s making it very difficult making actually a decision. But we should be making an offer in the next week or so and we feel really good about it. There’s a couple people in there. So, if first one doesn’t take it, maybe the second one will. But all in all, they are really great candidates and they bought into our strategies and our plans to grow the Bank.

And with that I would just say we did include some economic data in the press release in general, positive trends continue in the markets in California and the nation as a whole.

Now, I like to open it up -- Adrian if you’d like to open up the lines for questions that would be great.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Tim Coffey from FIG Partners. Please go ahead.

Tim Coffey

So, thanks for the color on the hirings and these seem to be mostly frontline people. Are you also making additions on support personnel as well?

Mitch Derenzo

Right now, we believe we have the support staff. We’ve got some pretty quality people in our underwriting and credit admin area. The hope is we get this machine really cranking and working those people hard and if need be, we will. But, I think right now we are in pretty good shape.

David Ritchie

Yes. Our underwriting staff, I mean, there’s varying degrees of talent there, but you have a couple analysts. I think the total count is about seven people. So, I think we’re in pretty good shape for growth.

Tim Coffey

Okay. And then if we could just go over one more time the timing of these hires. So, you went without Chief Credit Officer salary during 1Q. And I think, Mitch you said in your comments that some or all of the lenders have started in April?

David Ritchie

About half. We had one in January, Tim; and then, we had three that started on April 2nd; and we had one that started this last Monday, which was the 15th or so. And so, we have another one starting, I believe in two weeks. And I think that about does it.

Tim Coffey

Okay.

David Ritchie

So, most of them -- about half are in April.

Tim Coffey

Okay. So, we should see a rise in salary expenses from here?

David Ritchie

Yes.

Tim Coffey

Yes. Again, since you don’t give guidance, that wasn’t actually a question; that was the comment. And then, I do have a question on the timing of this relationship that drove mostly your deposit growth in the quarter. Do you have any kind of timing -- idea on timing on when the decision might be made on the future of those funds?

Mitch Derenzo

We don’t, it’s pretty much why we are keeping the funds liquid.

Tim Coffey

We’re going to kind of model this and look at this going forward pretty -- would you say there’s a pretty low probability that your average balance of fed funds will be this level at the end of next quarter?

Mitch Derenzo

Well, I think if I were doing the modeling on this, I would just exclude it because there is not a huge spread between the fed funds and what were paying them.

Operator

Our next question comes from Tim O’Brien from Sandler O’Neill.

Tim O’Brien

So, do you have the end of quarter FTEs and also the end of your FTEs?

Mitch Derenzo

I’m going to say, at the end of March, it was 90 and I think it was 92 or 93 at the end of the year.

Tim O’Brien

And then, I assume….

Mitch Derenzo

Again, we had some RMs that left in the quarter and we are adding some more in April.

Tim O’Brien

And then, are there any of the hires besides the Chief Credit Officer at the senior or executive level that you are looking to fill or are you fully staffed beyond Chief Credit Officer?

David Ritchie

Yes. We’re good. That’s it.

Tim O’Brien

And then, I assume some of the increase -- well, taking out the severance cost from 4Q, a good chunk of the income, how much of the first quarter increase was kind of seasonal accruals for payroll taxes, Mitch?

Mitch Derenzo

I don’t have that number, Tim. But, it’s a few additional percent on the overall...

Tim O’Brien

So, how about this, how much was tied to the new hires, approximately?

Mitch Derenzo

Let me rephrase -- let me regroup here and let’s say most of those new hires started in April.

Tim O’Brien

So, you have one new hire in January and that was it, really and that’s what showed up.

Mitch Derenzo

Yes.

Tim O’Brien

Would you guys care to offer a ballpark of what the 2Q number could look like with all the hires? That would be pretty helpful, other bankers do that but I don’t know if you’re willing to do that. It might be a new American River. You might’ve -- might be more forthcoming or something like that.

Mitch Derenzo

I’ll repeat what I said, I’m not going to give you the numbers going forward but remind you that we...

Tim O’Brien

I just wanted to get you on the record one more time. I’m taking my lessons from the National Press Club that works the White House. They just repeat it over and over until their foreheads are bloody.

Mitch Derenzo

Well, I’ll sit on information later to give you any insider information. How’s that?

Tim O’Brien

And then, would you guys have any annual merit increase that you -- that kicks in second quarter or something?

Mitch Derenzo

It really does kick in April 1st. Yes.

Tim O’Brien

And is that typically 3%?

Mitch Derenzo

Typically 3%.

Tim O’Brien

Great. All right. Was there anything else that was one-time in nature in the P&L either on the expense side or my suspicion is no, you would’ve mentioned it probably, but just double checking.

Mitch Derenzo

The odd items were -- the fed funds -- the fact that we actually invested in fed funds. And then the $25,000 rebate that we got from the current processor.

Tim O’Brien

All right. Just remind me, what was your prepay -- interest prepay number for 4Q ‘17? You gave it for a year ago and you give it for this quarter.

Mitch Derenzo

The prepayment penalties?

Tim O’Brien

Yes, for 4Q?

Mitch Derenzo

That was --I’ll have to dig down on that, Tim. What I gave was I gave first quarter this year and first quarter last year.

Tim O’Brien

Okay. Yes, if you wouldn’t mind digging that out that’d be great, Mitch. And then, that nonaccrual number that you guys posted to the thousand [ph] in your press release that was in there, just tucked away and I missed it.

Mitch Derenzo

No. You badgered me enough to change going forward.

Tim O’Brien

All right, that’s fantastic. And then, did you have any repurchase authority remaining on the 5% buyback plan?

Mitch Derenzo

Yes. I think the announced was roughly 306,000 and we repurchased 264,000, so 42,000 or so pending.

Tim O’Brien

Great. Those were my questions. Thanks, guys.

Operator

And our next question comes from Don Worthington from Raymond James.

Don Worthington

Just a couple more. In terms of kind of following on Tim’s question on the buyback, what are your thoughts on maybe another one, once this one is exhausted in ‘18?

Mitch Derenzo

In the past couple of years. we’ve done it another round. The stock price is ticking up a little bit more. It was a lot easier to do it when we were trading closer to tangible book. That’s really up to the Board. I’m happy that I was able to purchase roughly 270,000 shares in the first quarter. That’s good. As you know, as the number of shares reduce, it gets tougher to acquire shares. I am a fan of the buyback but I can’t say that the Board is going to decide -- for the reasons that I said, there is no guarantee.

Don Worthington

And then, in terms of deposit pricing, are you starting to see upward pressure, either from customers or just in the marketplace on increasing deposit prices?

Mitch Derenzo

I was hoping no one is going to ask that Don because I was about to -- I was in my -- when I was doing my comments, I was going to say something about that but we really haven’t had a lot of pressure, I’m knocking on wood here, on our core deposits. As I mentioned,. the CD rates have been going up, as those re-price, they tend to price to the treasury. But our core deposit base has an increase. You can see -- you will see that if you compare first quarter last year to the first quarter this year, money markets did increase, but we are paying up a little bit for that high, the large deposit relationship that I talked about. So, that’s tweaking a little bit but overall savings or checking accounts really haven’t had much pressure, which again I’m knocking on wood on that. I don’t want to jinx it.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference call. Thank you for participating. And you may now disconnect.